Core Viewpoint - The Chinese innovative pharmaceutical sector is undergoing a significant valuation reassessment, driven by favorable policies and a surge in overseas transactions, leading to a strong market performance this year [1][2]. Group 1: Market Performance - As of July 24, the A-share innovative drug index has surged over 40%, with some individual stocks increasing by more than 500%. The Hong Kong Hang Seng Healthcare Index has risen by 73%, significantly outperforming the Hang Seng Index's 24% increase [1]. - The innovative drug sector's strong performance is closely linked to frequent positive policy developments, including measures to support high-quality development of innovative drugs announced on July 1 [2]. Group 2: Policy and Market Dynamics - The new policies include improvements in medical insurance payment policies and optimization of review and approval processes, which are expected to enhance the market environment for innovative drugs [2]. - The total value of domestic innovative drug overseas transactions reached $48.4 billion in the first half of the year, nearing last year's total and marking a historical high [2]. Group 3: Valuation and Future Outlook - Despite high valuations, HSBC believes that the reassessment is not yet complete, as Chinese pharmaceutical companies are becoming crucial players in global pharmaceutical innovation [3]. - The report anticipates that multiple new drugs will be launched between 2026 and 2029, supported by strong product pipelines and clinical trial progress [4]. Group 4: Catalysts for Growth - Three main catalysts are expected to sustain the momentum in the pharmaceutical sector: upcoming academic conferences, continued overseas licensing deals, and a favorable policy environment [4][5]. - Significant clinical research data is anticipated to be released at the World Lung Cancer Conference (WCLC) and the European Society for Medical Oncology (ESMO) annual meeting in September and October [4]. Group 5: Financial Projections - Leading pharmaceutical companies are entering a revenue growth phase, with an expected average sales growth of approximately 11.2% in the first half of 2025 [6]. - The average compound annual growth rate (CAGR) for profits of covered leading pharmaceutical companies is projected to reach around 18% from 2025 to 2027, driven by new drug launches and normalized business development income [6].

Core Viewpoint - The game rules for innovative drugs have changed by 2025, with overseas giants valuing early-stage R&D in China, prompting institutions to reassess their valuations and investment strategies [11] Group 1: Historical Context - Previously, investment institutions focused only on "quickly sellable drugs," disregarding early-stage pipelines due to high risks, with a failure rate of 90% in early projects [2] - Traditional valuation models, such as PE ratios, only considered current profits, leading to the neglect of early pipeline values in innovative drug companies [3] Group 2: Changes by 2025 - Starting in 2025, major pharmaceutical companies like Pfizer and Merck began aggressively acquiring Chinese innovative drug pipelines, especially early-stage projects, with notable transactions such as a $12.5 billion upfront payment for a PD-1/VEGF dual antibody from 3SBio, totaling $60.5 billion [4] - The technological advancements in Chinese innovative drugs have shifted from imitation to global leadership, exemplified by BeiGene's cancer drug generating $2.6 billion in annual sales in the U.S. [5] - The expiration of patents for major drugs has led to increased acquisitions from China [6] Group 3: Industry Reactions - Pharmaceutical companies are investing heavily in early-stage projects, with 35% of the 672 billion yuan spent on R&D in 2024 directed towards early-stage initiatives [7] - CRO companies are experiencing a surge in orders as pharmaceutical firms outsource early-stage research, with AI technologies reducing research timelines and increasing demand for CRO services [8] Group 4: Investment Logic Transformation - The investment logic has shifted from counting "fruits" (marketed drugs) to counting "buds" (potential future products), utilizing new algorithms like rNPV to assess pipeline success rates and future earnings [9] - The secondary market has responded positively, with the PE ratio for innovative drug stocks in Hong Kong rising from 15x to 22x [10]

Group 1 - The core viewpoint is that the pharmaceutical sector is experiencing a phase of revaluation, particularly in innovative drugs, which is expected to continue in the long term [2][3][4] - The market has fully recognized the pessimistic expectations for the pharmaceutical sector, influenced by economic downturns and regulatory pressures, but it overlooks the innovation and technological aspects of the industry [3][4] - The Hang Seng Medical ETF (513060) tracks the Hang Seng Healthcare Index, which consists of 70% innovative drugs and their supply chain, indicating a focus on the recovery of innovative drug valuations and cyclical recovery [4] Group 2 - In the short term (1-3 months), the pharmaceutical index is expected to enter a phase of volatility, with a consensus on the revaluation of innovative drugs [2] - In the medium term (3-12 months), the outlook for the pharmaceutical index remains optimistic, as it is currently at a low valuation compared to historical levels [2][3] - The recovery potential for cyclical aspects of the pharmaceutical sector, such as medical devices and consumer healthcare, is significant as the economy stabilizes [3][4]